The Federal Reserve should stop trying to offset the economic costs of President Donald Trump’s trade war and instead force him to bear the consequences of the most aggressive use of tariffs since the 1930s, according to the former president of the Federal Reserve Bank of New York.
“Officials could state explicitly that the central bank won’t bail out an administration that keeps making bad choices on trade policy, making it abundantly clear that Trump will own the consequences,” William Dudley, who stepped down last year after nine years as the head of the New York Fed, wrote in an opinion column for Bloomberg.
In an extraordinary broadside, Dudley said the Fed also should consider how its actions will affect the 2020 presidential election since, “Trump’s reelection arguably presents a threat to the U.S. and global economy, to the Fed’s independence and its ability to achieve its employment and inflation objectives.”
The veteran policymaker’s argument quickly drew fire on social media from across the political spectrum. On Twitter, Dan DiMicco, former chief executive of Nucor and a leading backer of Trump’s protectionist stance, likened Dudley’s call to “rooting for the Germans in WW2…escalates to wanting the USA to lose.”
Jared Bernstein, a former economic adviser to Vice President Joe Biden, tweeted that Dudley’s recommended course “could easily backfire as Trump often doubles down when challenged like this. Far too risky a play, in my view.”
An economist who worked at Goldman Sachs for more than two decades before joining the Fed, Dudley is now a senior research scholar at Princeton University.
His remarks ignited a fierce debate Tuesday over how the Fed should navigate the treacherous economic and political waters it faces.
Federal Reserve Chair Jerome Powell last month cut the benchmark U.S. interest rate by a quarter percentage point to mitigate a global growth slowdown he blamed, in part, on the president’s unconventional trade policies.
Powell stressed that the Fed took no position on Trump’s imposition of tariffs on imports from China and several other nations. But uncertainty resulting from the president’s on-again, off-again threats of additional trade barriers was depressing business investment and sapping manufacturing activity around the world, he said.
Dudley suggested that the central bank’s actions were encouraging the president “to escalate the trade war further, increasing the risk of a recession.”
The bank, he wrote, should not “play along” with Trump’s trade policy overhaul.
If Powell ruled out further rate cuts to address trade war fallout, he would discourage the president from additional risky escalation, demonstrate the Fed’s independence and preserve the bank’s ability to cut rates if the economy tips into recession.
Though he appointed Powell to a four-year term in 2017, Trump has grown relentlessly critical of the Fed chairman for keeping interest rates higher than those of key U.S. trading partners, including in Europe.
On Friday, Trump labeled Powell “an enemy” of the United States for failing to cut rates more quickly.
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